March 08, 2013 3962 VIEWS

Friday, March 08, 2013 / By Telis DEMOS, Steven RUSSOLILLO & Matt JARZEMSKY/ WSJ


U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market's rally. Companies in the S&P 500 index are expected to pay at least $300 billion in dividends in 2013, according to S&P Dow Jones Indices, which would top last year's $282 billion.


Analysts say this year's number could go even higher. Apple Inc., for example, stands to pay out about $10 billion this year in a dividend policy initiated last year. Exxon Mobil Corp. and AT&T Inc. are each also set to pay dividends around $10 billion.


American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market research firm. Home Depot Inc., General Electric Co. and PepsiCo Inc. are among a number of large companies that announced plans last month to scoop up large amounts of their own shares.


The Federal Reserve on Thursday paved the way for more activity. In its "stress tests" of banks' financial health, the Fed said 17 of the largest U.S. financial groups have enough capital to keep lending even if the economy were to take a sharp downturn. Several banks are now expected to boost dividends and share buybacks.


The large payouts are boosting investors' confidence in a stock-market rally that has pushed the Dow Jones Industrial Average to a record. Buybacks have an even more direct effect than dividends on companies' share prices because they can boost earnings-per-share, a closely watched measure of profitability, by reducing shares outstanding, although some companies use the stock they buy to deliver shares to executives who exercise stock options. On Thursday, the Dow notched its third consecutive record close, ending at 14329.49.


"We are starting to get out of hunker-down mode, so what you have now is a bunch of cash-hoarders who have decided to take that cash out of their balance sheets," said David Ikenberry, dean of the University of Colorado's business school. "Is that a good thing? It probably is. They're liberating capital and putting it back out into the capital markets, and letting that multiplier effect kick in."


One other possible effect: higher tax revenues for the government.


On Jan. 1, the top rate on capital gains and dividends for most top-bracket taxpayers jumped by two-thirds, to nearly 25% from 15%, counting surtaxes. Others will pay from 15% to about 20%, while some will continue to pay zero.


It is difficult to gauge the exact effect but federal revenues appear to have increased already because of the bump in investment-tax rates. A new estimate Thursday by the Congressional Budget Office suggests that taxpayers have made significantly higher tax payments in recent weeks, as a result of shifting income such as dividends into 2012, in order to avoid the 2013 rate increases.


The CBO said in a monthly budget analysis that tax receipts in the category that includes capital gains and dividends since Oct. 1 have climbed by about $15 billion, or 16%, from the comparable period last year.


In returning money to shareholders, companies by and large are tapping into cash piles they have accumulated in the past few years by cutting costs or taking advantage of low interest rates to borrow funds.


The Federal Reserve's latest quarterly "Flow of Funds" report, released on Thursday, said that cash and cash-equivalents held by U.S. corporations, excluding financial companies, stood at $1.79 trillion in the fourth quarter of 2012, up from $1.77 trillion the previous quarter.


"Corporations are flush with cash and that cash sitting in the corporate coffers is earning next to nothing," said Rob Leiphart, an analyst at Birinyi. "Companies have to do something with it."


A number of investors, eager to beat the meager returns offered by Treasury bonds have poured money into funds that buy only stocks that pay out big dividends.


Funds in the U.S. that focus on dividend-paying stocks have seen $17 billion in inflows each of the past two years, according to the corporate finance advisory group at J.P. Morgan Chase & Co., while broader funds saw outflows of $80 billion the last two years.


Others have targeted companies that have large cash piles that could be returned to investors in the form of buybacks—even Apple is under fire from activist investor David Einhorn to return to shareholders more of the $137 billion in cash the company holds on its balance sheet.


Some investors, however, warn that buybacks and dividends aren't the best use of company cash. They argue that companies may be returning too much cash as stocks reach record price levels, and instead should begin to consider acquisitions or other investments in growth.


"Companies call it returning value to shareholders," said Greg Milano, chief executive of Fortuna Advisors LLC, a corporate-advisory firm. "They're saying 'I don't know what to do with this. You take it.' It's not something to be proud of."


Last month, 130 companies authorized buybacks, compared with 68 a month earlier.


Studies of whether buyback announcements presage long-term stock gains have produced mixed results. In 1995, Mr. Ikenberry found that companies announcing share repurchases, on average, had a compound return 12 percentage points higher than peers that didn't after four years.


"You're telling the market your stock is undervalued and that is, on average, right," said Michael Weisbach, a finance professor at Ohio State University who has researched corporate stock-buyback activity. If companies are snapping up their own shares, he said, "things must be looking rosy for the companies and their balance sheets."

Similar buyback activity occurred the last time stocks hit record highs. During the housing boom that ended in 2007, S&P 500 companies ramped up their share buybacks to what were the highest levels in history.


One study suggested that companies are better off buying stock when stocks are undervalued. In a study by 's Citigroup’s Financial Strategy & Solutions Group of more than 10,000 buybacks from 2005 to 2013, companies that were trading below their five-year median price-to-earnings ratios saw an average share price bump of 2.7% from 20 days before to 60 days after an announcement. Companies above that level saw only a 1.3% average jump.


—Laura Saunders and John McKinnon contributed to this article. Write to Telis Demos at, Steven Russolillo at and Matt Jarzemsky at  

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